A social tax policy I could agree with

by Keli'i Akina, Ph.D., Grassroot Institute, February 3, 2024

It used to be that you could trust the Legislature to not raise taxes during an election year.

That’s when we could all breathe a sigh of relief, confident that the desire of politicians to get reelected would keep our wallets safe a little longer.

But not this year.

An emerging trend at the Capitol has been social-policy tax hikes. These proposals have all the features of traditional tax hikes, but with the added appeal of advancing a particular social-planning goal. In addition, they often are aimed at easy targets, such as tourists, out-of-state homebuyers or “the rich.”

All of the tax bills at the Legislature that my Grassroot Institute of Hawaii colleagues testified on this week fit into this category. Among those were:

>> SB3053, which would impose a conveyance tax hike on property values at more than $6 million, and is touted by its advocates as a “tax on real estate speculation.”

>> HB2778, which seeks to add a surcharge to the transient accommodations taxes paid by tourists staying at short-term rentals outside of resort areas.

>> HB1537, which would “repeal the counties’ exclusive power to tax real property” by allowing the state to levy a property tax surcharge on residential investment properties worth $3 million or more.

>> SB2525, which would create a “carbon tax” that would increase the tax on fossil fuels — such as gasoline — by more than 3,800% over 10 years, then increase it every year thereafter into infinity. SB2525 also proposes a large tax credit in the hope that it will quell public resistance to the immensely higher cost of fuel that it would cause.

So what is the problem with these kinds of taxes? Why shouldn’t lawmakers target tourists, short-term rental owners or wealthy real estate buyers, or try to reduce Hawaii’s “carbon footprint”?

The main reason to oppose tax proposals such as these is that it is nearly impossible to create a tax that won’t affect Hawaii’s economy as a whole.

For example, conveyance tax hikes on high-value properties can discourage both commercial and residential investment, leading to lost jobs and economic stagnation. In addition, such taxes are less effective than lawmakers might hope because the target group has the means and incentive to find loopholes or simply leave the market.

Perhaps more important, high-value properties are moving targets, especially in Hawaii — where home values have risen so quickly that more and more, average property owners are finding themselves perilously close to being included among “the rich.”

Regarding the proposed TAT surcharge, this likely will affect tourism spending, which would affect a wide range of businesses in Hawaii besides just short-term rentals. Depressed tourism spending would also depress tax revenues — maybe that alone could persuade lawmakers to reject this bill.

Meanwhile, adding a state surcharge to county property taxes on higher-value properties would send a discouraging signal to the market that the state has planted its flag in the property tax realm, and likely would expand its newfound taxing powers in the future.

As for the carbon tax, even a generous credit to Hawaii residents would not be able to offset the depressive effects of a massive tax hike on fuel and energy. The burden would be felt widely, especially by lower-income residents and businesses that rely on transportation.

The reality is that there is no such thing as a neutral tax. Trying to tax just one group or product and expecting that it won’t affect the economy as a whole is like trying to add sugar to just one side of your coffee. It simply doesn’t work.

Tax hikes have consequences for our economy, our job market and our cost of living. As my Grassroot colleagues constantly point out in our legislative testimonies, Hawaii residents and businesses need a break from relentless tax hikes, fees and surcharges.

In a sense, reducing taxes can also be a “social policy” tactic. By giving our economy a chance to grow, everyone in Hawaii could experience greater economic opportunities to earn and build wealth. We could end the exodus of our families, friends and neighbors to the mainland or elsewhere, and we could all more easily thrive and prosper.

Now that’s a social goal I could go along with.